The Gross Domestic Product (GDP) report came out last week and showed that the economy grew at a rate of 4.1% last quarter; the highest growth rate in the last 4 years. A common question we get from our clients is “what does this mean for my investments?” The answer is: not necessarily much moving forward. While GDP is heavily quoted by the media and government officials it doesn’t tell the whole story. Sure, strong GDP numbers are definitely a good thing, but the stock market is more concerned about what’s coming next.
The stock market is perpetually looking forward to future earnings. The strong GDP numbers that were just reported for the 2nd quarter of 2018 are a good explanation of why the stock market was up in the last quarter of 2017. The GDP boost from tax reform and other fiscal stimulus was already reflected in stock prices months ago. It is not uncommon for investors to look forward 6 to 9 months when buying stocks. The market almost always works this way. It’s looking at what’s next, which is where the classic ‘buy the rumor, sell the news’ quote came from. The stock market and GDP tend to both have a positive trajectory over long periods of time, but they aren’t always coordinated month-to-month or quarter-to-quarter. Ultimately, the stock market cares more about earnings than it does about prior-quarter GDP.
Also, there are some negatives that have kept the market in check, including rising interest rates and uncertainty regarding the tariff/trade issues. If we do in fact end up in a trade war the downside would be slower growth and higher inflation. When you realize that the revenue breakdown by S&P 500 companies is about 60% U.S. and 40% foreign you begin to understand that foreign growth has a much greater impact on the U.S. stock market than many people think.
We’re getting later in this expansion which historically means growth looking forward is unlikely to be as strong as potential growth early in a cycle (and right after a recession). While many of the analysts we follow give different numerical projections (over different time frames) of where the stock market is headed, the general consensus is that over the longer term the market will continue to grow, but at a rate that is lower than its historical average.
So, what does this mean for you and your portfolio? Being an investor means steeling yourself for both the good times, and the bad. Any money that you have invested should be able to ride the ups and downs of the market for the long haul. Keep your eye on the long term goals. If history is any guide, maintaining a diversified portfolio is a much more effective way of mitigating market volatility than trying to time economic and market news.